Opinion: Next time, Draghi should say the ECB has done all it can

MatthewLynn

LONDON (MarketWatch) — Interest rates taken even deeper into negative territory. A fresh round of QE. Extending the length of the existing program. Buying up even more unconventional assets.

Short of literally flying across Naples or Lisbon in a helicopter and chucking out freshly minted euros, it is hard to know what else European Central Bank President Mario Draghi can do to revive the eurozone economy.

Ahead of Thursday’s meeting of the European Central Bank, the markets were looking for yet more extreme policies from the ECB, and speculating feverishly on new gimmicks it might launch. As it happened, the bank didn’t expand its stimulus program, but Draghi did say that quantitative easing would continue for a while.

Next time, Draghi should just ignore the pleas to do more — and try something genuinely radical instead. He should admit the ECB has done all it can to revive the eurozone economy and hand the job over to the politicians.

In the markets’ favorite term, that really would be a Big Bazooka.

Is It Time for the ECB to Invest in Equities?

(3:45)

The European Central Bank is running out of bonds to buy, but has yet to start buying stocks. WSJ’s Tom Fairless joins Lunch Break with Tanya Rivero to discuss the pros and cons of an ECB investment in equities. Photo: Reuters

When the ECB met Thursday, it is widely expected to ease policy once again. According to a Bloomberg poll, more than 80% of economists expected the ECB to extend its existing program of quantitative easing beyond the existing March 2017 deadline. A similar number expected it to tweak the rules of the type of assets it can buy, and in what quantities.

None of that was delivered, although Draghi didn’t rule anything out.

In fact, an extension of QE has already been taken for granted. The real interest is in what other measures the ECB can take to try to pump some life into the economy.

It could start experimenting with ways of handing money directly to small business, or pumping it into the housing market. It could impose steeper negative rates. It could start buying equities as the Japanese and Swiss central banks have done. It could even start steps towards abolishing cash — some of the wilder conspiracy theorists already detect signs of that in the ditching of the 500-euro note.

Heck, it could start ordering companies to start investing at gunpoint, or locking people up if they didn’t hammer their credit card at the shopping mall every weekend. It has tried just about everything else.

But hang on. What exactly is the point? Is there anyone out there who seriously believes it is going to make any difference?

It is now more than a year now since the ECB launched its program of QE. The bank started pumping money into the economy in March 2015, which is now 18 months ago. It has stepped up its efforts since then, increasing the size and scope of its purchases, making it one of the largest ever undertaken. In total, it has taken 1 trillion euros of assets onto its balance sheet. And the impact? Almost nothing.

Inflation across the eurozone is still running at only 0.2%, a whisker into positive territory and still well below the bank’s target. In Spain, prices are actually falling by 0.3% a year — not bad for a policy that specifically aims to get prices moving up again.

Only this week we learned that growth across the zone was even lower than previously thought, at just 0.3% for the latest quarter. Investment spending had completely stalled, despite the fact that QE was meant to get companies spending again with the new money that banks would suddenly be lending to them. France and Italy, two of the zone’s three largest economies, have slipped back to zero growth despite a generally growing global economy.

There is no sign of credit expanding, and the banking system is just getting into deeper trouble — you only have to look at the pressure on the Deutsche Bank share price
DB, -3.05%
for evidence of that.

Even the euro
EURUSD, -0.7253%
has not weakened any further. At 1.12 to the dollar, it has hardly moved since QE was launched. Any hopes that the zone could export its way out of trouble through currency devaluation must surely have evaporated by now. Meanwhile, unemployment remains as bad as always, and, outside of Spain, there is no evidence of a recovery in the peripheral countries.

If ever a policy could be described as completely ineffective, then surely this one can be.

What Tools Does the ECB Have Left?

(2:49)

With stubbornly low rates of inflation and interest rates that are already negative, Todd Buell and Tom Fairless look at the tools the European Central Bank can still deploy at its next policy meeting on Thursday. Photo: Getty Images

There should be something more to show for it. When the Federal Reserve and the Bank of England launched their first rounds of QE they had some results after 18 months. The economies were not fixed but they were not sliding into deflation, nor were they weakening. And yet the ECB has nothing to show for its efforts. It hardly makes any sense to keep pushing harder on the same levers — they clearly are not working.

In fact, yet more action will do more harm than good. Why? Because it provides the cover for the continent’s political leaders to do nothing.

There shouldn’t be any mystery about what the eurozone needs to do.

In the first instance, it needs to be turned into a full-blown political and economic union, with fiscal transfers from the richer regions to the poorer. Next it needs a massive fiscal stimulus to pull it out of what by now should surely be described as depression.

It is crazy that Germany is running trade surplus of 9% of gross domestic product, and this year is planning on running a budget surplus as well. It should be borrowing and spending more to lift demand across the whole zone, and so should the rest of the surplus counties.

Another blast of QE, a shift to deeper negative rates, or even a new gimmick like buying equities, is just a more sophisticated way of burying your head in the sand. Draghi should simply state that the bank has done everything in it power to restore the eurozone’s economy and that now it is up to national political leaders to do the rest.

It might not work — but it would deliver the kind of shock the system needs right now.

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